Sea Limited – Dip or Doom?

In recent weeks, stocks like Nvidia were up by more than 30% and on the flipside, companies such as SEA Limited experiencing crazy drops.

At the point of writing, SEA Limited closed below its 200-day moving average which could be an indication of more weakness to come in the stock’s price action.

Personally, I bought the dip and if you’re struggling to put together a bullish thesis amidst this volatility then you’ve come to the right place.

In this article, I’m sharing three reasons why I’m still investing in this company despite the current market volatility. From the reactivity of their management to improving fundamentals, I’ll explain why I bought the dip on this company and why it should be on your watchlist!

If you prefer to watch a video (with my latest updates), don’t miss this ????

1) Nimble Management

I believe that good companies are able to navigate their way swiftly through hard times. Having senior management make tough decisions and middle management execute them speaks wonders of how efficient a business truly is.

In this case, I believe we’ve all seen the extent of the layoffs at SEA given that they were one of the first few companies in the world to spark off these tech layoffs. The company’s ability to pivot and adapt to the current macroeconomic situation is indeed an example that gives me confidence as an investor that should SEA see another crisis, that they too will be able to navigate their way through it. The same certainly cannot be said for companies such as Intel or Paypal where till this day, I have no clue what those companies are doing to turn their stock prices around.

Credit also goes to the team at SEA for being aligned with Li’s vision. I’ved worked in companies where employees are so demotivated that any orders from management are simply left to be completed ‘in their own time’. In this case, we can see that any decision from Li has indeed translated to actionables which have been executed swiftly by the team over the past year.

2) Improving Fundamentals

While we have bits and pieces of SEA’s1Q2023 earnings to consider, in my opinion, I do think that the fundamentals of the business as a whole has indeed improved year on year.

While some may argue that their Digital Entertainment segment saw a decline of almost 50% from the last quarter, its important to note that over 2/3 of their revenue comes from E-commerce, hence so long as the revenue from their “main source of income” does not see any major contraction, I simply see this as just fluctuations in consumer spending patterns.

E-Commerce

Whats’s interesting about SEA’s E-commerce business is that it also shows barely any contraction in their GAAP Marketplace Revenue given that they this sector continues to show strength.

While the market seems to think that consumers are pivoting to more “experiential” methods of shopping, it is clear that to some (at least) that the habit of shopping online has indeed been engraved into their daily lives.

Any concerns that they are losing market share to TikTok shop also seem to be quelled given how they are able to maintain this growth.

Digital Entertainment

No surprise there on how Garena has seen their lowest quarterly paying user ratio in the last 5 quarters given that consumers are now more likely to be a little more prudent when it comes to spending on non-essentials.

This scenario also makes reference to my article on Grab where the market attributed the lowered spending per user as potential headwind for the future of Grab.

One Potential Headwind

On the note of GAAP Revenue, one potential area of concern that I’ve found is how revenue appears to be at a point of consolidation/stagnation (depending on how you see it).

While SEA reported a 5% gain in their quarterly revenue year on year (compared to 1Q2022), this is actually complete negligible as if you compare it to their 4Q2022 revenue, SEA’s revenue technically decreased by about 12% quarter on quarter.

• 4Q2022 Revenue = $3,451.6M
• 1Q2023 Revenue = $3,041.1M

Overall Net Income

Overall net income for SEA remains positive hinting that their 4Q2022 earnings was more than a one hit wonder.

While net income for 1Q2023 ($87.3M) was only about 25% of their previous quarter’s net income ($422.8M), only time will tell if they can keep this up.

3) Favourable Risk-to-Rewards : Technicals

Support at $60

I find the technical set-up to be favourable for a long position hence I took the opportunity to dollar cost average into the company last week. At the current price of $60, I find this to be a relatively ‘safe’ level to DCA given that this can be considered an interim support level as the price action did rebound off $60 back in early March 2023.

While some may argue that a more firm structural support level would be $40 (30% further downside from current levels) , that is something that I most certainly agree with however no one truly knows if we will revisit those levels hence the idea behind dollar cost averaging (though its not quite ‘regular’ intervals)

Oversold : RSI below 30

While a stock being oversold is by no means an indication that it is the bottom, it does indicate that the “bottom is near”. This is reference to the previous occurrence in the past where the stock saw such oversold levels which was around this time last year where upon falling below the RSI of 30, the stock rebounded and tested its key resistance level of $90.

Too Quick to Turn profit? Or just good Management?

SEA’s success in turning such a massive profit last quarter did indeed take the market by surprise (hence the 20% single day rally on the 7th of March). That did raise some questions and with their recent earnings, those same questions are indeed being floated around the market at present.

By and large, investors are wondering if such profits can be sustained or if those results were just a ‘shot in the arm’.

While it is unfortunate that their recent results did little to convince investors to hold, I continue to remain bullish on the longer term outlook of SEA, even more so at their current PS ratio of 2.7.